Thursday, May 27, 2010

Benmosche makes a big promise, but can AIG deliver?

"I'm confident you're going to get your money back, plus a profit." That was AIG CEO Robert Benmosche’s pledge to a Congressional Oversight Panel yesterday. This wasn’t the Benmosche who said last fall he was prepared to tell Congress to "stick it where the sun don't shine." But despite his conciliatory performance, afterwards panel chair Elizabeth Warren told the Wall Street Journal she was frustrated by the lack of detail to back up his projections. She started the hearing by calling AIG “a corporate Frankenstein, a conglomeration of banking and insurance and investment interests that defied regulatory oversight."

I’ve been very impressed with Benmosche’s ability to turn AIG around this year and I was also impressed yesterday that he was able to restrain himself during an inquisition by the people he once called “crazies.” He did get a bit testy at one point when asked about the testimony of Cliff Gallant, a KBW Inc. analyst who cut the stock to “underperform” last month because he thinks meeting U.S. obligations may wipe out common shareholders. Gallant is predicting AIG shares could be worth $6 within a year. Benmosche said of Gallant’s analysis, “You’ll have to see if he understands the company as well as I do,”

I appeared on Bloomberg TV to analyze yesterday’s hearing and told Mark Crumpton that I agree that Benmosche will be able to pay off AIG’s debt in full. The company has great prospects because it’s honed down a gigantic operation into two basic areas: Sun America, a life insurance business, and Chartis, the property & casualty operation, which made a great deal of the $1.45 billion in profits announced in the first quarter of this year. Benmosche is turning AIG into a smaller company with a great core business.

Once the government pulls out, a lot of great things will happen; foreign investments funds will move in along with other investors, and AIG will continue to make money, pay the government back, and grow the company into a reasonable size.
Benmosche will continue to face tough questions along the way, but it appears he now realizes he just can’t say whatever he thinks when it comes to Washington. The best thing for him, taxpayers, and AIG’s investors will be when the U.S. government is paid back and AIG can run its business with only normal regulatory supervision.

Tuesday, May 25, 2010

Dominating the board of directors – no longer business as usual at AIG

Probably the best part of being an author is getting to discuss the issues you write about with an informed group of people. That was the case at the Metropolitan Club in Washington, D.C., where I was the luncheon speaker last week, talking to a very sophisticated audience that knows both Wall Street and Washington.

There were lots of questions—Hank Greenberg may be gone from AIG, but everyone still wants to know what he is doing and how he is doing. While I spoke about many facets of AIG, most of the questions were about Greenberg. One question I hadn’t heard before was: Is there any connection between Greenberg’s settlement with the SEC and the fraud case again him, which was filed back in 2005 by then-New York Attorney General Eliot Spitzer? A judge recently called that case “devastating” and told Greenberg’s lawyer he saw big problems with establishing a defense. In August 2009, Greenberg agreed to pay $15 million to settle SEC accusations that he altered AIG's financial records to inflate its earnings.

At the time, the SEC did not talk about whether the settlement might have any impact on the related civil fraud charges brought by Spitzer. I noted that in that settlement with the SEC, Greenberg publicly declared that he never engaged in fraud and had no responsibility over accounting issues. That irritated the SEC, which said corporate leaders can’t use accounting gimmicks and sign off on distorted financial reports. Greenberg then released a subsequent statement saying that the size of his fine was “a reflection of the importance of the charge to the SEC.”

I also was asked about last year’s bonus controversy, which I think is finally becoming old news. And even though AIG seems to be on the road to recovery, I was asked if the company still plans to rebrand itself. My answer was probably not, since key subsidiaries, both the Asian ones and ALICO are being sold off and the core business has been renamed Chartis. So AIG remains only as the name of the holding company.

Perhaps the most interesting part of the event was when I was chatting after lunch with people who wanted their books signed. Someone mentioned that when Greenberg was CEO, he put Barber Conable, former congressman and head of the World Bank, as head of the audit committee of AIG’s Board of Directors. Conable reportedly then hired another accounting firm to advise the committee. (PwC had been AIG’s long-time auditor) and Greenberg reportedly strongly objected. People probably don’t remember that the audit committee said that it couldn't vouch for AIG's accounting in 2001 and 2002. The committee said it couldn't be sure that the audits had been carried out according to normal standards or even that PwC was in fact "independent," according to the Washington Post.

Today, because of Sarbanes Oxley, boards are much more independent. And thanks to the current crisis, they will be even more independent. All the D&O insurance in the world won't protect directors and their reputations. Challenging a CEO instead of signing off on whatever he wants is becoming the norm. The Wall Street Journal reportedly recently that a special board committee at AIG, which includes directors with experience in restructuring and workout situations, has engaged investment-banking firm Rothschild as an independent adviser. If AIG’s board had been that independent, proactive, and knowledgeable in financial matters ten years ago, it could have stood up to Greenberg’s domination of the board and AIG today just might be in a very different place.